The PURA Meeting in Delhi

I was invited to attend a meeting at the Ministry of Rural Development at the Krishi Bhavan in New Delhi on the 7th of July. (Here is a note which I wrote while waiting in the lobby.)

The meeting was chaired by Renuka Vishwanathan, Secretary, Mininstry of Rural Development. Largely the meeting was attended by secretaries from various state governments such as Chattisgarh and Orrisa. There were a couple of people from President Kalam’s office; Dr PV Indiresan, the architect of PURA; Dr PS Rana, Chairman and MD of HUDCO (Housing and Urban Development Corporation); a couple of people from the Council of Indian Industries (CII); and a few others.
The meeting began with an extended introduction by Ms Vishwanathan. She was interested in figuring out the cost of PURA and how she could justify that cost. She stressed that there are various governmental bureaucracies with their existing funding which are already working on all the various components of rural development. What is it that PURA proposes to do which is not being already done?

As the meeting progressed, I realized that what PURA was going to do was to add another complex bureaucratic organization to the already massive one. If bureaucracy was what helped development, India should have been the most developed economy in the history of the universe. If upliftment of villages was what is needed for rural development, surely the rural population would be thriving considering that for decades, village upliftment has been at the core of all public policy.

When after the introductory remarks Ms Vishwanathan requested my opinion, I made my usual point. I asked them to consider the question: Is rural development about the development of villages or is it about the development of the rural population? There is a distinction which we neglect with sad consequences.

A “developed village” is one which does not lack water, electricity, housing, sanitation, telecommunications, good road/rail connectivity, employment opportunities in agricultural and non-agricultural activities, schools, entertainment, medical and health care facilities, well-developed functioning markets, recreation facilities, government services, and a few other things.

To make a village “developed” you need, among other things, money. If money were no object, you can have a developed village in short order. And if you had sufficient money, it would be pretty easy to develop India’s 600,000 villages. Let’s remember that India has more than half a million villages with an average population of 1000 people. Each village can be developed (as defined above) at a conservative cost of Rs 100 crores (or about US$22 million). The per capita cost of developing a village is a modest Rs 10 laks (or US$ 22,000). For 600,000 villages to be developed, you need only about Rs 600,00,000 crores (or US$ 13,200,000,000,000, or $13.2 trillion).

India’s annual GDP is around $600 billion. So $13.2 trillion is about 20 years’ worth of India’s production would have to be fully invested in India’s villages for the villages to be developed. The resources required to do village level development at a modest Rs 100 crores per village is of the order of the annual gross national product of the US.

A bit of arithmetic is all it takes for us to realize that the idea of developing 600,000 villages is nonsense. (Those who refuse to do arithmetic are doomed to speak nonsense.)

Sure, one can quibble with the figures: use Rs 10 crores instead of Rs 100 crores per village. You still end up with US$ 1,300 billion as the cost of making the rural population developed through “village-level” development. When you are talking about trillions of dollars, we just don’t have it.

Why is village-level development so expensive? I call it the “too many, too little” problem. Villages are unable to take advantage of certain economies because they are too many of them and they are too little. They thus cannot gain from agglomeration economies, and economies of scale and scope.

Cities exist because of the density of aggregation is high and this reduces the cost of providing services and infrastructure and the cost of engaging in any economic activity (transaction costs). The presence of lower cost services and infrastruture in cities is made possible by economies of scale and scope. The availability of low cost infrastructure and services coupled with lowered transaction costs makes the population more productive. That is why economic development is both a cause and consequence of urbanization (the dense aggregation of people in cities): you cannot have one without the other.

For India to be developed, India has to be an urban economy. By that I mean, the majority of India’s population — say, 80 percent — has to be in cities and towns, instead of the current only 30 percent. In other words, if you were to look at a developed India somewhere in the future, you would see that India does not have 600,000 small villages any more. Aggregations of 1,000 people (which is what an average Indian village is) is just not consistent with a developed economy. What 600,000 tiny villages is consistent with is dire poverty and which is what we have.

If 600,000 villages is not what we will eventually have (if ever the 70 percent of the Indian population have to move out of poverty), then there is little point in doing village-level development. It makes no sense to behave as if forever rural India will continue to be 600,000 villages. And that is precisely what the government in its myopia is doing. It is attempting to take very very limited resources (orders of magnitude smaller than the required trillions of dollars) and spread it on the “development” of 600,000 villages.

The point I attempted to make at the meeting was that we should be focusing on the development of the rural population and NOT the development of villages. As long as one insists on keeping the rural population in tiny villages, one is dooming them to poverty.

The fatal flaw of PURA is that its object of interest is the village. My model — RISC — avoids developing villages like the plague.

Now back to the meeting. It is possible that resources will be allocated, another layer of bureaucracy will be added, more meetings and reports generated, and the same old cycle of useless spending undertaken. Or maybe the whole exercise will get entangled in bureaucratic red-tape and nothing much will happen and only a little bit of resources wasted.

In the meanwhile, I have hope that other people, working on their own initiative and with a vision of what the future can be, will take India forward. One such person is the chairman of HUDCO, Dr PS Rana. I met with him briefly the next day and I will write about it the next time.

Dear Atanu,
I can’t understand the importance of urbanisation. Although the economy in reducing the distribution cost through concentrating population appeals to me, I dont understand how people living in cities do activitie like farming and tourism.
Cant something like Amul be done? Wont that bring ‘development’ to villages?
Thanks

Atanu’s response: Yes, one can do something like Amul. But while a half a million people make a modest living out of an Amul, when you recommend that to 600 million, it will not work.

Let’s do some arithmetic. The Indian population needs food which its agricultural sector will have to produce. Assume that a person needs a certain amount of raw food per month which at the farm gate cost Rs 500. Assume 70 percent of the Indian population is into agriculture and their only source of income is the food that they sell to the non-agricultural sector. Then the average monthly income of a rural person is Rs 150 per month.

Compare that to this other scenario. Keeping all else the same, assume that only 10 percent of the population is in the agricultural sector. Then the average monthly income of a rural person is Rs 450.

Can you raise the per capita monthly income of a rural person to Rs 450 and yet maintain 70 percent of the population in agriculture? Yes, if you increase the farm gate costs from Rs 500 to Rs 1,500. Or, if you triple the amount of agricultural production — that is, increase productivity — and do so without affecting the price. (Note that in general, when the supply increases, the prices obtained can decrease.) Both are unlikely for various reasons.

The bottom line is that the population has to move out of agriculture and into non-agricultural activities. Farmers will stop commiting suicide when farmers are able to make a decent living out of agriculture. They cannot do so now because there are simply too many people who are into farming.

For people to be productive in non-agricultural activities, they generally have to be in cities. That is called “urbanization.”

V

Atanu,
You claim that farmers are commiting suicide because there are too many of them. Can you explain that statement. From What I have read farmer’s suicide is caused by raising input costs, dumping by countries with high farm subsidies, spurious seeds and pesticides and debt trap.
As I understand it, there are so many structural shackles on agriculture that it is impossible to make a decent living from it.

The point Atanu is entirely valid- cities and urabnization are the most efficeint form of providing infrastrcture. To further understand how transaction costs impact development take the example of NYC or London as financial capitals- dense urban agglomerations where people can meet each otehr, exchange ideas, and transact substantial business at a lower cost than by living in suburbs or small towns. Pual Krugman had a column on NYC’s resurgence detailing all of this (11th July’s- “The Hindu”).

On getting people out of agriculture- leaving aside farmer suicides which is a most depressing fact, quite simply having human beings engaging in activities that are not economically productive or intellectually challenging is not desirable. We simply do not need 72% of our population engaged in growing food to feed all of us. 10-20% should do if only we adopt solutions based on technology and economic policies designed to create larger number of non-agri professions/ occupations.

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I agree that India should rethink the way their villages currently exist to get them what they need to grow and flourish.

Arithmetic or not – there are developed rural areas all over the world. The money may nor be there presently. But it can be brought in.There is absolutely no reason why the entire financing has to be borne by the govt. Whenever there is an investment mela, it is for promoting urban India. Come up with profitable investment packages for making PURA a viable economic reality across India’s villages and the money will come in from NRIs, businessmen and capitalists across the world. That is the answer.